The real estate industry has been in flux since COVID-19 upended nearly every industry in 2020. In many areas, rent collections have more or less stabilized, and a new stimulus bill passed in late December 2020 contained new and extended relief for businesses and individuals.
Real estate businesses that have struggled in 2020 do have some options. Below are several strategies to consider that can boost revenue, lower taxes, and maintain an outlook for growth.
Increasing Cash Flow and Revenue
It’s always a good idea to maintain a capital reserve and access to liquidity in times of crisis or unexpected purchases. Building back up a cash reserve after 2020 is not impossible, it just takes some intentional planning.
The CARES Act, passed in March 2020, contained several pieces of legislation designed to help put money back into companies’ bank accounts. Many expired at the end of 2020, but the new stimulus relief bill passed on December 27, 2020 extended some valuable tax benefits. Temporary changes that can increase cash flow and/or tax refunds include but are not limited to:
- Employee retention tax credit – available on a quarterly basis for eligible businesses – extended through July 1, 2021 and with expanded tax benefits
- COVID-19 sick leave tax credit (from Families First Coronavirus Response Act) – extended through March 13, 2021 on a voluntary basis
- Payroll tax deferral – if elected, this lasts until the end of 2020 and amounts are paid back in 2021 and 2022
- Qualified Improvement Property (QIP) – this change is permanent and allows real estate and other companies to take 100 percent bonus depreciation retroactive to January 1, 2018
- Net operating loss (NOL) carrybacks up to five years for tax years 2018, 2019, and 2020 plus 100 percent loss deduction until 2021
Refer to this post to refresh on the whole list of CARES Act-related tax changes.
Another potential area to maximize cash flow and reduce taxes lies in Opportunity Zones. If you experienced gains in 2020, you can potentially defer the taxes by investing cash equal to the gain in an Opportunity Zone investment. Recent legislation has eased certain timing requirements to make Opportunity Zone investments more accessible.
Outsourcing Targeted Functions
One area that gained traction in 2020 was outsourcing key functions to expert consultants. This was already happening prior to COVID-19 and allowed companies to reduce costs and maximize return. After the pandemic hit, outsourcing became a way for real estate companies to remain agile, adaptable, and lean.
Benefits of outsourcing include:
- Leveraging the internal team’s time for specific functions
- Upskilling the internal team with the leveraged time
- Achieving better, often faster results for certain objectives
- Maintaining compliance for constantly evolving regulations, especially in finance and accounting
- Accessing a level of expertise in a subject matter that is not available in-house, or hard to train for
- Adapting to changing size without increasing/decreasing internal staff
Whether outsourcing takes the form of accounting, software, IT, marketing, or something else depends on the business type and processes of the company. In the future, it will be important to develop a strategy around outsourcing to ensure real estate leaders get the most value for their investment.
Impact of Changing Tax Laws
President Biden has indicated support for raising taxes on corporations and individual taxpayers making more than $400,000 per year. Additionally, he has called for taxing capital gains at the ordinary rate for taxpayers with $1 million or more in income. There is also the possibility that the popular 1031 exchange could be further restricted or eliminated; though not necessarily mentioned by name, Biden expressed a desire to eliminate tax loopholes in industries like real estate.
Real estate businesses need to be prepared for the possibility of 2021 or 2022 tax changes now that the White House and Congress are governed by the same party. Although the Democratic party now holds a majority in the Senate, it is a slim margin, so large-scale, party-line policies may still have trouble passing muster.
Real estate stakeholders should evaluate current year and projected future earnings, and consider the impact of tax changes on their strategic growth plans. It may make sense to accelerate certain transactions and income before current conditions change.
Every situation is different and may require a different approach. Being aware of current trends affecting the real estate industry can help leaders spot opportunities for growth and help maximize tax and cash savings.
Key Takeaway
Monitoring the real estate industry and proactive tax planning can help real estate companies preserve cash flow, maximize revenue, and position themselves for the right opportunities. Uncertainty creates opportunities for real estate leaders with the right mindset – and advisory partners.
For more information about Windham Brannon’s Real Estate Practice, email Brent Wilkinson at [email protected] or Micah Greenberger at [email protected].
